Re-Manufacturing: 60 Seconds with Niall Ferguson

Big Idea: Economic and Institutional Flexibility.  

Harvard historian Niall Ferguson discusses the idea of bringing manufacturing back home to the United States. He suggests that economics will make this shift in production attractive.

In terms of economics, US wages would either have to fall dramatically, eliminating Chinese arbitrage opportunities, or the US Dollar would have to weaken much more than it already has. Ferguson however portrays these as improbable, and also indicates that these are not the only important factors in relocation decisions. 

For Ferguson, not all parts of the US are attractive to investors, which poses a larger problem.  More often than not, companies will have to deal with trade unions, taxation laws, and a lot of red tape.  He believes that if the United States can be flexible and have an attractive market for manufacturing, then the movement back to the US becomes more feasible.

This attractive market includes an efficient legal system.  It is assumed that the US has a good legal system, with strong private property laws and rights.   However, when the rule of law is measured through corruption and criminality in business, along with the cost of litigation and the efficiency of courts, the US does not even fall in the top 30 countries.

Ferguson claims that manufacturing is not simply about whether it is cheaper to produce in the US or abroad, but about whether a specific location offers the right resources, and institutions, which includes the legal system. The US competitiveness score has decreased over the past five years, showing why nobody is in a rush to locate their businesses in the US.

Over the next couple of years, we will discover which one of these theories comes out on top.  Do institutions matter enough to keep production abroad? Or will there be a move back to US production because of economic reasons?